North Korea: Investors Shouldn’t Get Their Hopes Up

The historic meeting between President Donald Trump and North Korea’s Kim Jong Un last night has set off speculation about possible commercial opportunities investors could tap into if relations between the countries begin to thaw and sanctions are eased.

History suggests investors may want to lower their expectations.

Kevin Lim/THE STRAITS TIMES/Handout/Getty Images

At the risk of stating the obvious, any suggestion North Korea will become open to investors or U.S. companies is a very big question. It is difficult to conceive North Korea giving up its nuclear capability, writes Stuart Culverhouse, head of sovereign and fixed income research atemerging and frontier research firm Exotix Capital, in a note this morning, adding that the country has made similar promises before—in 1994, 2005, and 2007—only to break them.

Still, the idea of tapping a closed economy is hard for investors to resist. There has been similar buzz in recent years after the U.S. lifted sanctions against Myanmar and eased some restrictions against Cuba. If sanctions against North Korea are relaxed and relations improve, some of the first opportunities would come from multinational companies participating in North Korea's development, says frontier and emerging markets money manager Asha Mehta of Acadian Asset Management.

Over time, an equity market could develop, as it has in Myanmar over the past few years. “It’s perhaps a good corollary in that its infrastructure was shattered and the population was very unprepared after years of repressive rule,” says Josh Kurlantzick, senior fellow for Southeast Asia at the Council of Foreign Relations. But progress in Myanmar has been modest amid political unrest and continued human-rights abuses. The tiny Myanmar Stock Indexhas fallen about 56% since its inception in 2016.

In the nearer term, Mehta says, Cuba and Iran may be better points of comparison—and in both places, equity market developments have stalled. Though Iran's stock market is reasonably large and liquid—on par with those in Egypt and Kuwait—and trading at sharply discounted valuations, the U.S. stance on these countries means access to the market is not possible and the outlook is uncertain, she adds.

Those who have tried to indirectly tap into opportunities in Cuba through the Herzfield Carribbean Basin(CUBA) closed-end fund haven't fared all that well. The fund has fallen 4% since President Barack Obama’s trip to Cuba in March 2016; over the same period, the S&P 500 has risen 35%.

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North Korea: Investors Shouldn’t Get Their Hopes Up

The historic meeting between President Donald Trump and North Korea’s Kim Jong Un last night has set off speculation about possible commercial opportunities investors could tap into if relations between the countries begin to thaw and sanctions are eased.

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